I've started and been involved with companies that have collectively raised over $100M in venture capital and have exited for close to $1B in M&A. I've also written for Harvard Business Review, built hundreds of sweet Lego creations, conducted research in nano-technology, and joined National Ski Patrol over a decade ago as the youngest patroller nationwide (even though I patrol on a snowboard). I write about some of these things and more on this blog, on twitter, and on Google. But chatting is better than writing so please drop me a line @ hello@danreich.com.

Bitcoin: The Two Ways Entrepreneurs and Investors Are Thinking About It

The discussions that are happening around Bitcoin feel a lot like those from the early days of the internet. It’s like when my parents asked me about AOLAOL dial-up. “Who is the computer calling? Now the questions are, “what are these Bitcoins and can I see what one looks like?”

I discussed this topic with a handful of Bitcoin entrepreneurs and Bitcoin investors and so I figured it made sense to lay out some high level thoughts on Bitcoin for my own sanity and hopefully yours. To start, I think there are two important ways to think about Bitcoin.

1. Bitcoin as a currency.

2. Bitcoin as a technology.

Bitcoin as a currency. Like all things throughout history, we know that change is inevitable and currency is no different. Once upon a time forms of money included cattle, salt, shells, and precious metals. As time went on the world evolved and so did the currency that went along with it.

As Thomas Friedman would say, today the world is flat. Our telecommunications make it dead simple to communicate and transact with anyone, anywhere around the world at any moment in time. In short, Bitcoin is a new currency that was designed for this new world. In this video, Eric Vorheese does an excellent job explaining the evolution of money and why the characteristics of Bitcoin, as compared to gold and our dollar, make Bitcoin such an intriguing form of currency for a digital world. That analysis look something like this:

Scarce?

Convenient?

Secure?

Central backing?

Gold

Yes,there is only so much of it in the earth.

No,it’s very heavy.

Kindof, depending on where you store it.

No, no single authority owns gold.

US Dollar

No, the government can print money, which they often do (inflation).

Yes, its lightweight paper.

No, it can be counterfeit.

Yes, the government provides its full faith and credit to the US dollar.

Bitcoin

Yes, only ~21M bitcoins will ever be created.

Yes, it’s digital.

Yes, it’s secured by math puzzles that only super computers can solve.

No, like the internet, it’s not owned or controlled by any single entity.

Only time will tell if Bitcoin can survive as a currency but fundamentally, it makes sense to me that there should be a currency specifically designed for a hyper connected, digital world.

Bitcoin as a technology. To fully understand what Bitcoin can mean as a currency, you must also understand how it works at the technology layer. This video does a nice job explaining the technicalities of Bitcoin, but the core innovation of Bitcoin is that there is a public ledger that is very secure because of some complicated math. Albert Wenger of Union Square Ventures describes it this way:

At the heart of bitcoin is a fundamental innovation: a distributed public ledger. A ledger in accounting is a book that you cannot edit once you have written in it. Instead, if you have made a mistake, the only way to fix it is to add another transaction to the ledger that undoes the error. As we know from accounting fraud, problems arise when people figure out ways to transact without recording it in the ledger or making ex post changes to the ledger (this is why Quickbooks isn’t really an accounting system). The bitcoin ledger is the so-called blockchain which uses the fact that there are many copies of it that are broadly distributed combined with a fair bit of math to ensure that once a transaction has been recorded in the blockchain that transaction can not be changed after the fact. There is no other widely used protocol in the world today that accomplishes this: with bitcoin anyone can make a statement (a transaction) and have this be recorded in a globally visible and fixed ledger.

Years ago, information was controlled and distributed by single entities. This is why media conglomerates and newspaper companies were so powerful. When we talk about how the internet disrupted those companies, we are really saying that new protocols created the disruption. The protocols provided a way to send and receive instantaneous information without anyone’s permission. The protocol behind Bitcoin is providing the same type of disruption only instead of sending information without any third-party involvement, we are now able to send money without any third-party involvement. In essence, we are democratizing money and rewriting the rules for how commerce can be conducted.

This creates a tremendous amount of opportunity. Naval Ravikant, CEO of Angel List published a piece in Wired magazine about the future possibilities of Bitcoin. Here is a clip:

Just as the web democratized publishing and development, Bitcoin can democratize building new financial services. Contracts can be entered into, verified, and enforced completely electronically, using any third-party that you care to trust, or by the code itself. For free, within minutes, without possibility of forgery or revocation. Any competent programmer has an API to cash, payments, escrow, wills, notaries, lotteries, dividends, micropayments, subscriptions, crowdfunding, and more. While the traditional banks and credit card companies lock down access to their payments infrastructure to a handful of trusted parties, Bitcoin is open to all.

So will this Bitcoin thing work? Is it a good investment? Should you buy some Bitcoins?

I have no idea. But what I do know is that this feels very much like the first time I signed on to AOL and that to me is very exciting.

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Exactly. I go further back…to setting up a dial-up account with the local university computer lab, which offered Unix telnet-capable accounts and limited hosting space per account for a small donation. I learned how to use Unix with a “for dummies” type of guide and started poking around with telnetting into MUSH servers and using the Lynx browser to check out the early web…before there was a graphical user interface or inline images.

Nobody understood it. My parents made me get my own phone line installed, so I wouldn’t keep tying up the main line by dialing out. Eventually AOL, Prodigy and Compuserve came along and made things more user-friendly, but with super limited access to the “real” internet. When high speed internet arrived and ISPs started giving you their own installers, the ease of use ramped up…and as Internet Explorer took hold and websites got more interesting (and more abundant), the future came rushing up to us. Now look where we’re at, 20 years later. Nobody can imagine life before the web, social media, MP3, streaming video on Netflix…

Those of us who’ve been to this show before can see cryptocurrency for what it is. The rest will react much the same way people reacted to me, when I was goofing around on Nyx.net in the mid 90s…or ripping MP3 files before there were any portable players, etc… My personal belief is that 10 years from now, Bitcoin and/or Litecoin will be in daily use by almost everyone and because of the infrastructure and software that’s been created around/on top of it, they probably won’t need to know or CARE to know anything about HOW it works…only THAT it works.

People right now see price fluctuations and get scared. They aren’t thinking big picture. This is early adoption and price discovery, it’s going to fluctuate for quite a while, until it reaches mass adoption…which it will. There’s too many smart entrepreneurs out there, working toward solutions most of us haven’t even though about. There’s a lot of money coming into this and the reason is, people can see that its time has come.

Kevin, I think you are spot on. I actually remember the pre-AOL days as well when I was hacking around on DOS (but probably not much earlier than that).

The question I keep asking myself now are “what are the tools and solutions needed to bring cyrptocurrency to the masses?” The other part of that is time. How long will it actually take for people to get comfortable. It could be 1 year, and it could be 10. From a business perspective, that questions is just as important as the idea itself.

I think the best way to exchange bitcoins in USD is on bitcoins4currency.com i get my bitcoins exchanged to any currency in seconds, i can withdraw my bitcoins in any cashmachine around the world, if you wanna check it, go to bitcoins4currency.com i see the future.

Enough talk, Bitcoin is valuable because it will disrupt almost every financial services industry. Not hard to figure it out. On to next topic. Did you know there is a burgeoning alternative cryptocurrency market. They trade against Bitcoin and they are are starting to move upward at a very fast rate.

come to www.crypto-coins.org to learn about them and how to procure them.

The problem now is pretty clear. We need the innovation from small companies that can leverage the technology to make the world a better place — with fewer bankers:-) The existing financial services sector will fight to its last breath to delay the progress of free enterprise.

These are exciting times. I just can’t wait to see what this whole thing will look like in a few years. There’s so much businesses accepting Bitcoin today, it’s sometime hard to believe. And nothing seems to indicate it’s going to stop, it’s a domino effect. The people behind Bitcoin really are geniuses.

I am just looking at Coinmap and usebitcoins.info http://coinmap.org/ http://usebitcoins.info/

..And I’m impressed to see the numbers constantly increasing everywhere on the map, and increasing faster over time. I thought only online businesses would use Bitcoin in its first years, but I was plain wrong..

I was also wrong when I thought that more businesses accepting bitcoins was required for the price to increase, it’s the other way around : increases in the price seem to lead to more businesses accepting bitcoins.

also check out this article that coined the term hyper-monetization in regards to bitcoin mass adoption http://konradsgraf.com/blog1/2013/4/6/hyper-monetization-questioning-the-bitcoin-bubble-bubble.html

This is a great, simple overview of bitcoin that I think most newcomers/non-techies will understand.

It’s very interesting to see the tone used in media coverage change from only a few months back as people start to understand how it actually works and the implications. BTC is agnostic – it can be used for evil and good. And indeed there’s a lot of room left for discussion on how to improve it for humanity’s benefit. It is a protocol after all, something we can modify and build on top of – just like the internet itself.

Unfortunately, people focus on price. It is a non-trivial question, but it is a completely separate discussion IMO. BTC is a paradigm shift and people need to understand the WHY first. So thank you for this article.

yves, how is that any different than oil or gold? More units are never created beyond 21M but smaller units could just become worth more. Just like there is only so much oil and gold in earth, there are only so many bitcoins created. Yes, you could slice them up but you’re never ‘creating’ more units that way.

I like the fact that this currency does not serve the interest of solely one nation.

But I believe that as a currency, the amount of coins created should be based on the growth of the world’s economy, not how fast can we “mine”. Dan, how you see the currency stabilized once it reaches its cap? Hypothetically if someone borrow 21m bitcoins and has to pay back a total + interest, with what bicoins will he pay interest?

Assuming that this currency is here to stay, is to assume it will have a limited niche (ie internet illicit transactions) therefore will never replace all other currencies.

People like to compare it to the Internet, unlike bitcoin, internet can grow as much as it needs to.

Jonas, by ‘stabilize’ I mean, it won’t grow at these parabolic rates like we’ve seen over the past few weeks. It will however continue to increase in value because the currency is in fact scarce. That increase in value is roughly equivalent to the interest gained.

Unfortunately, the way the US gov pays off it’s debt and interest today is by turning on the money machines and paying back debt with newly printed money, which in turn causes inflation, and decreases the value of the money you have in your bank account.